After moving so slowly on a bitcoin ETF that the applicant eventually withdrew the proposal, the U.S. Securities and Exchange Commission is still interested in considering blockchain technologies and derivative products.
Today, Adrian Zmudzinski at Cointelegraph reports on the SEC looking for “sources” around blockchain phenomena, or, as you might say in the corporate world, seeking “subject matter experts” to enlighten them on how the blockchain works.
“the SEC is trying to find businesses able to provide blockchain data to support its risk monitoring and compliance enforcement activity, as well as inform the commission about digital assets,” Zmudzinski writes, citing a recent SEC statement clarifying what the agency is looking for. “Last month, the agency announced that cryptocurrencies are one of the its top examination priorities for the current year. According to the Jan. 31 statement, the agency expressed interest in potential sources for data concerning the most popular blockchain ledgers. Other than providing the data, the companies are also required to parse the data for ease in reviewing.”
Specifically, he mentions, the SEC wants to look at data extraction, conversion and verification processes for blockchain-related financial vehicles. As Zmudzinski notes, the agency is interested in “capacity to derive insights from the available data – including the identification of the owners of crypto addresses.”
Why does the SEC want to know this?
Part of the reason is because the nature of cryptocurrencies is so inherently tricky.
Crypto is kind of the quantum mechanics of finance – crypto is both an asset and a process. It’s tangible, yet intangible. A coin is a coin, but then again, it’s really not a coin.
Confused yet? Check out this excellent essay from Edan Yago last November published at CoinDesk, titled “What the SEC doesn’t get about cryptocurrency”
In it, Yago lays out the essential problem – that cryptocurrency assets are really just examples of proofs that computing work has been done.
“They are cryptographic proof that a specific set of mathematical functions has been performed,” Yago writes. “They are proof that certain software instructions have been performed and of the algorithmic outputs of that software. And crucially, the mathematical functions are performed by nobody in particular, they are performed by the network as a whole. … Property is “ownership determined by law.” Crypto assets are not property because they are not determined by law – they are determined by maths (sic). This presents some obvious issues when it comes to figuring out exactly how to regulate them.”
Using the example of spoon-bending in the popular 1990s-era film “The Matrix,” Yago goes so far as to say that there really aren’t two people handing coins back and forth – there are computer addresses showing consensus information that represents blockchain work.
“The SEC is introducing vague and problematic language,” Yago writes. “Who provided the smart contract? Who performed its functions?”
Then, he goes on to say that the nature of coins is confounding how the SEC may be preparing to rule on them.
“This confusion gets worse when the SEC talks about secondary markets for these securities,” Yago writes. “Crypto assets are so new that even many experienced practitioners are confused and think that they represent a distinct property. As a result, as an industry, we have been far too willing to indulge the SEC view that since something was the product of a securities offering, it remains a security thereafter. Once we realize that there are no ‘tokens’ and no ‘property,’ we realize that this is a categorical error.”
Tokens, he says, can’t really be described as securities, because securities are held between legal entities and enforced by law.
“Tokens held by smart contracts fail both these tests,” he writes. “They cannot properly be described as securities. However, the SEC is suggesting something radically new: that a set of instructions which involves no agreement, no persons and is not enforced by law (but rather by math) can yet still be viewed not just as a contract but as a security. This is a radical departure from existing law.”
If you’re interested in cryptocurrencies, expect this debate to be front and center as crypto activity picks up around the world. We have to be able to very clearly define what these coins are, and what they do. We can’t have legislative bodies and others looking at them from a newcomer’s perspective and trying to figure out, like the blind men with the elephant, what it is that they’re touching.